Where We Were
2025 was another great year for equities, as well as fixed income – despite a cloud of despair present in so many minds around the country. President Trump rode a strong wave of economic hope and goodwill early in the year, mostly focused on dismantling selective government overreach and lowering taxes. That goodwill was quickly dashed against the rocks of see-saw tariff and trade policy changes, retaliation by quite important (and powerful) trade partners, as well as an unwise attack on the Federal Reserve and the members of the FOMC. As a result, confidence as well as economic and earnings growth projections tapered off between the end of Q1 and into Q2. That both coincided with, and likely caused, an overdue equity market correction between March and April.
Market conditions and confidence rose again after Q2 earnings results started to come in, as they did not reflect the doom-and-gloom forecasts of many an economist and talking head. Corporate earnings rode a tailwind of stronger-than-expected incomes, spending and net worth, as well as expanding margins and cash flow led by growth companies. Strong earnings results and forecasts continued throughout the rest of the year. Equity returns were strong across the board and led by foreign emerging markets (+34%), foreign developed markets (+31%), and US large cap growth (again, +22%). The S&P 500 rose +18%. Fixed income returns were extremely even across the board and generally well above their long-term averages, buoyed by tapering inflation and overall US economic growth projections (after inflation) of a bit less than 2%. The Aggregate Bond index rose 7%, while 7-10 year Treasurys, investment-grade corporates, mortgage-backed, and high yield bonds all returned 8+% on the year, proving once again that the Chicken Littles (“60/40 is dead”) should remain unheeded.
Where We Are
Source: Factset
April Brought Fresh Flowers, and Fresh Highs. The S&P 500 index was up 10.5% for the month, now up about 6% YTD, and at a new, all-time high. Q1 Within the S&P 500, Growth was 15% for the month, while Value was flat at 6%.
The US Aggregate Bond index is up 0.2% YTD. The 10-year T-Note yield is at 4.39%.
Q1 Results. With 60% of S&P 500 constituents reporting, 79% beat revenue estimates, with the average upside surprise being 2%. 81% of companies beat EPS estimates, with the average beat coming in at 20%. Actual Q4 EPS growth is 30% vs. the 13% expected at the beginning of Q1.
S&P 500 earnings expectations. For 2025, final EPS was $270/share, up 13% vs. 2024. The 2026 estimate is $323 (+20%), 2027 is $374, (+16%), and 2028 is $415 (+11%). P/E ratios for ’26-28 are 22x, 19x and 17x. The P/E-to-Growth (PEG) ratios are 1.1, 1.2 and 1.5. The average EPS growth rate over the past 20 years is 7%; the average trailing and forward P/E ratios are 19x and 17x, while the 20-year average trailing PEG ratio is 2.7x. The consensus median price target for the SPX is 8390 vs. 8340 a month ago, and 8318 sixty days ago, for an implied return of +16%. If achieved this calendar year, the implied total return for the S&P 500 in 2026 would be 22%.
Where We're Headed
Earnings growth is again a strong catalyst. Remember that Q4 2025 actual EPS came in at 14%, DOUBLE the year-over-year growth expected. So far for Q1, with about 60% of earnings season completed, actual growth is 30%, 130% above the 13% growth estimated at the beginning of the quarter. EPS estimates for this year are 5% higher than they were 90 days ago, and 10% above where they were a year ago. The earnings estimate trend parallels increases in estimates for household income and spending for 2026-7, thereby increasing the estimates for GDP growth – especially from a dip last summer when Tariff Fears were at their worst. As shown below, the trend in estimated earnings per share for coming quarters and years is unquestionably up and to the right. Stock prices have responded in kind.
Markets are looking past current oil-related shocks – at least for now. As written last month, the old rule of thumb was that if oil price increase lasted a year, a $10 increase would equate to a 0.1% decline in GDP growth. And while we all recognize that protracted oil price shocks have to be recessionary at some point, for now that’s not remotely expected, and equity markets are (rightly) focused on the present and longer-term prospect of continued revenue, margin and earnings growth as they relate to growth sectors. Even the maligned Microsoft (MSFT) saw 39% year-over-year growth in its cloud business in calendar Q1, 40% growth guidance, EPS growth of 23%, and a 1.1% rise in its overall operating margin. GE Vernova (GEV) had EPS growth of 1500%. Even old Intel (INTC) grew earnings by 120%. Meanwhile, Procter & Gamble (PG) grew EPS by 3%. Over the next 8 quarters, the level of EPS of S&P 500 companies is expected to grow by 43%. This should encourage you – if you let it…and make sure to review this month’s Econ/Market slide deck for more positive longer-term trends.
Source: Factset
Source: Factset
Source: Factset
Sources: Morningstar, Factset. Performance data represents past performance and is no guarantee of future results. This material has been compiled from sources deemed reliable; it is not guaranteed as to its accuracy and does not purport to be complete. All information contained herein is subject to change without notice. The information is not intended to be used as the basis of investment decisions.